International Financial Reporting Standards_guide.pdf

Chapter 4 Statement of Cash Flows (IAS 7) 41
4.6.7 Many valuation models use cash flow from operations, thus giving management an
incentive to record inflows as operating (normal and recurring), and outflows as related to
either investing or financing. Other areas where management discretionary choices could
influence the presentation of cash flows follow:
■ Payment of taxes. Management has a vested interest in reducing current-year
payments of taxes by choosing accounting methods on the tax return that are likely
to defer tax payments to the future.
■ Discretionary expenses. Management can manipulate cash flow from operations by
timing the payment or incurring certain discretionary expenses such as research and
development, repairs and maintenance, and so on. Cash inflows from operations can
also be increased by the timing of the receipt of deposits on long-term contracts.
■ Leasing. The entire cash outflow of an operating lease reduces the cash flow from
operations. For a capital lease, the cash payment is allocated between operating and
financing, thus increasing cash flow from operations.
4.7 COMMENTARY
4.7.1 IAS 7 is a fairly simple standard and generally easy to implement. Nevertheless, some
practical issues have arisen in applying this standard; some of the more important issues
include these listed below:
■ There is no consensus as to whether or not cash flows should be presented inclusive or
exclusive of value added tax (VAT) since the standard does not specifically deal with
the treatment of VAT. The IFRIC has recommended that entities should disclose
whether the gross cash flows are inclusive or exclusive of VAT.
■ It is not clear whether investment in shares or units in money market funds that are
redeemable at any time can be classified as cash equivalents. In this regard the IFRIC
noted that for an item to meet the definition of cash equivalents, the amount of cash
that will be received must be known at the time of the initial investments. The units
therefore cannot be considered cash equivalents simply because they can be converted
to cash at any time at the market price in an active market.
■ There is inconsistent application in the banking industry regarding cash reserves held
with the central bank. Certain banks include those cash reserves in cash and cash
equivalents as they are considered to be resources available to the banking institution.
Other banks exclude these amounts as they do not control access to the funds.
■ The indirect method calculates cash flow from operating activities by using information
that is already available in the annual financial statements. It does not provide additional
information about the actual cash flows. The direct method is therefore recommended
and favored by external auditors.
■ IAS 7 has been amended and now requires that only an expenditure that results in
a recognized asset should be classified as cash flow from investing activities. This
amendment became effective for annual periods on January 1, 2010. There are no
other future developments expected for IAS 7.